Is the investment worthwhile? Which actively managed ETFs provide benefits for investors?
In the financial sphere, active ETFs are currently the main topic of discussion. Although the market for this younger sibling of traditional index funds is still relatively small, it's rapidly expanding. According to the magazine "Capital", it has doubled in the past five years, while the growth of passive ETFs has only increased by 20% annually. So, should you hop on this bandwagon? Let's clarify the key questions.
What exactly are active ETFs?
These are investment tools that sit between traditional, or passive, ETFs and classic funds. As explained by Stefan Witt from Finum Private Finance, "Unlike passive ETFs that simply mimic an index, actively managed ETFs aim to deliver better returns than the market through targeted stock selection and an active investment strategy." They share this approach with classic funds.
The difference lies in the use of stocks from the index they reflect. By overweighting or underweighting certain stocks, actively managed ETFs aim to surpass the performance of their passive counterparts.
What benefits and drawbacks do these products offer compared to traditional funds and ETFs?
They're often praised for combining the best of both worlds, as Markus Lautenschlager, portfolio manager at BV & P Asset Management, puts it. "Affordable management in a transparent framework, paired with active management expertise." However, critics argue it's just old wine in a new bottle. According to investment experts, the truth likely lies somewhere in the middle. Compared to passive ETFs, actively managed ETFs offer the potential to outperform the market, as well as the ability to target specific thematic or niche markets, something not possible with passive indexing.
In return for this flexibility and active management, investors pay higher fees. In this field, actively managed ETFs lie somewhere between the other two options. "Actively managed ETFs are generally cheaper than actively managed funds, but more expensive than many widely diversified passive ETFs on popular indices, which are available for only 0.03 to 0.12% per year," says fee-based financial advisor Michael Ritzau from South Baden Fee-Based Advisory.
Additionally, as less-known investment products, actively managed ETFs sometimes struggle with liquidity, leading to larger price discrepancies during buying and selling, primarily affecting those investors utilizing larger volumes.
Is it wise for individual investors to incorporate active ETFs into their portfolio?
Michael Ritzau considers some cost-effective actively managed ETFs with ongoing costs of 0.2 to 0.25% to be a worthwhile addition to a portfolio. However, he questions whether their strategy will truly yield better returns. He advises against expensive active ETFs.
Using a calculation example, Ritzau demonstrates why: If an investor plans to invest 20,000 euros at a 5% annual yield and leave it untouched for 20 years, they'd earn 2,500 euros less in after-tax profits if they opt for an actively managed ETF with 0.5% annual fees, compared to a passively managed ETF with 0.1% annual fees.
Similarly, Merten Larisch of the Bavarian Consumer Center advises individual investors to steer clear of actively managed ETFs, suggesting they can achieve a satisfactory overall return through classic ETFs. The targeted weighting of individual titles in actively managed ETFs can lead to yield reductions. After all, active selection always carries the risk that the manager's expectations may be incorrect. Statistics show that most fund managers fail to beat their respective benchmarks.
What range of actively managed ETFs are currently available to investors in Germany?
According to Merten Larisch, German investors currently have around 150 actively managed ETFs to choose from, compared to approximately 2,500 passively managed ETFs.
What should potential investors pay attention to when making their selection?
First and foremost, consumers should scrutinize the investment strategy of an actively managed ETF, advises portfolio manager Lautenschlager. Only then can they determine any potential advantage over passive investment. Additionally, they should aim for low costs as much as possible, considering that this significantly contributes to long-term investment success. Lastly, research on the websites of ETF providers or supporting websites is crucial to understand the handleability of the securities. High liquidity — a large managed asset value of the actively managed ETF — is a strong indicator of this.
In the context of considering various investment options, Equity funds could also be a consideration beyond actively managed ETFs. Equity funds are traditional investment vehicles that aim to deliver returns by investing in a diversified portfolio of stocks. Though they operate differently, some investors might find Equity funds appealing due to their potential for higher returns compared to passive investments.
Furthermore, actively managed Equity funds, just like actively managed ETFs, aim to outperform their benchmarks through active stock selection and strategic management. They offer investors the opportunity to benefit from the expertise of professional fund managers and potentially capture returns from specific thematic or niche markets that may not be available in passive indexing.
